Starbucks' Secret Recipe for Growth

Written by: Antoine Gara02/22/13 - 8:00 AM EST

Tickers in this article:
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NEW YORK ( TheStreet) -- Starbucks(SBUX) , the largest U.S. coffee retailer, has a lot on its plate. The company is adding food and drink items, pushing into supermarkets around the world, building more shops and devising novel payment platforms.

Thankfully for investors, Starbucks' own java-addicted customers may help guide it through an ambitious expansion plan that risks overreach, which burned the coffee roaster over a decade ago.

As Seattle-based Starbucks undergoes what may amount to CEO Howard Schultz's second major growth offensive after retaking the reins, he may have an unappreciated buffer against slip-ups.

An increasing reliance by customers on pre-paid loyalty cards and mobile applications may help Starbucks in its roll out of recent acquisitions such as juice maker Evolution Fresh , tea specialist Teavanna and bakery chain La Boulange .

Meanwhile, as Starbucks builds its payments capabilities through a partnership with Square, a popular loyalty platform and a highly rated smartphone app, it may have the right infrastructure to grow in emerging markets like India and China.

Starbucks' unique growth agenda, and the risk it carries, has been a key theme for the company's earnings, given a backdrop of stable profit from existing stores and retail channels. Still, an upbeat outlook and strong performance from lesser-known areas of the company are a welcome surprise.

The performance of what's called the Starbucks Card was the highlight this holiday season, and that could give Starbucks reason to expect consistent growth in 2013 amid a year of expansion.

In the first quarter of 2013, Starbucks saw $1 billion loaded on Starbucks Cards, a 25% increase from a year earlier and a new record for the company.

That figure would have amounted to about a quarter of the company's overall revenue of $3.8 billion if card loads were immediately recorded as sales.

Taken another way, the Starbucks Card accounted for 25% of all U.S. tender, the company noted on an earnings call. The card's 20%-plus growth rate far exceeded overall revenue and same-store sales growth of 11% and 6%, respectively.

"This is a positive for sales, and Starbucks indicated that its strong U.S. sales trend has continued in January," Joseph Buckley, a Bank of America Merrill Lynch analyst, wrote of figures from the Starbucks Card and the company's earnings outlook.

"The growth in members and value loaded on Cards is very encouraging both near and long term."

CEO Schultz was exuberant.

"In terms of what happened in holiday in Starbucks Card, I must say it was stunning and almost unbelievable," he said on the company's January earnings call.

A discussion with analysts and an executive overseeing the Starbucks Card indicates that Schultz's excitement may stem from the unit's importance to the company's overall expansion, a key investor pitch in recent quarters.